What Moves Gold Prices Up and Down?

by Peter Christensen | Reviewed by Joseph Sherman | Updated September 10, 2021

This chart shows what moves gold prices up and down and how gold prices work

Table of Contents

» Relationship to Inflation » Supply Factors » National Banks » ETFs » Portfolio Considerations » Holding Value » The Bottom Line

Gold prices are determined through a combination of supply, demand, and investor behavior. While this would appear to be logical and straightforward, the actual way that these variables interact go much deeper than they appear on the surface. A perfect example of this would be how financial speculators use gold as a hedge against inflation. That clearly passes the commonsense check as cash loses value the more it is printed – but why?  One might think that this has something to do with the amount of gold mined annually, yet that only adds a minuscule amount to the total supply. If that is true, then what really causes the price of gold to move and why?


  • Supply, demand, and investor conduct are key drivers of gold prices.
  • Gold is regularly used to hedge against inflation due to it’s finite supply, unlike paper currency which can be printed infinitely.
  • Studies show that gold prices have positive price elasticity, which means the value increases alongside fundamental demand.
  • Since gold historically increases in value when economic conditions decline, it is understood as an effective tool for diversifying a portfolio.

Relationship to Inflation

Claude B. Erb, who is an economist with the of the National Bureau of Economic Research, and Duke University’s Fuqua School of Business professor Campbell Harvey, have examined why gold is an interesting answer to out of control inflation.

Could it be that fear is what drives gold prices if not an inflationary dollar? This would seem quite reasonable. After all, during the Great Recession gold prices rose. However, this would be anecdotal evidence since gold was already going up in price until the start of 2008, approaching $1,000 an ounce prior to falling under $800. It then came back in direct contrast to the stock market which was crashing. Then, as the economy strengthened, the price of gold continued to rise, hitting a high of $1895 in 2011. Since then it has fluctuated, but even in 2020 the price was as high as $1575.

Gold was noted to have what Erb and Harvey termed, “price elasticity” in the article “The Golden Dilemma”. Simply put the more gold is purchased, the more it increases in value. As the authors state, there are no “fundamentals” driving gold value. No matter the strength of the economy or the current regulatory guidance, gold value increases when people are driven to buy it.

With that being stated, gold is still a hard commodity market item such as natural gas or oil. This means that the value of gold is not simply a game of chance or based upon the demand within the market place.

Supply Factors

Gold, in contrast to natural gas and oil, does not get consumed in applications. Since gold does not dissipate over time, we still have virtually all the gold that has been mined since the start of human civilization and more gold is being mined every day. Why is it then that the price has not dropped over time? After all, since there is increasingly more of it around the demand should drop.

There are several reasons for this such as population growth and economic prosperity. This has given more people the access to ability to purchase gold. It’s often comically stated, “It ends up in a drawer someplace.” This pulls massive amounts of physical gold out of the marketplace for generations, although only for a limited time as it does not have a “shelf-life”. 

Perhaps most fascinatingly, gold has been mined, produced, and supplied at a growth rate of 2% a year over the last 5,000 years, which is at the same pace as humanity’s population growth. So, for 5,000 years, there has never been a surplus of gold, meaning gold itself is not inflationary. 

Central Banks

What really shakes up the gold market however are the central banks. When economies are at the most stable and strong, the central bank will limit its stores of gold. Afterall, gold does not generate dividends or any other returns. Instead, they focus on items such as bonds.

The problem this creates is that investors are looking at gold through the same lens. They know that while stable, gold does not carry the same mega-growth potential as an early tech company or cryptocurrency. This stability acts as a safety net with dependable consistent growth. Therefore, as the central bank tries to sell, they find limited interest in the economy. This drives the price of gold down.

In an attempt to control the market and maintain stability, central banks manage their sales in the same fashion as the mafia coordinates with the other criminal family enterprises. To not flood the market with gold, all the banks abide by what is referred to as the Washington Agreement. This non-binding gentleman’s handshake states that the banks will sell less than 400 metric tons of gold each year. It is mutually beneficial for all parties to keep to the accord, as going against it would greatly affect their overall value and wealth.

Quick Fact

The Washington Agreement was endorsed on Sept. 26, 1999, by 13 countries and limits the offer of gold for every nation to 400 metric tons for each year. A second form of the arrangement was endorsed in 2004, at that point reached out in 2009.


In addition to the central banks, exchange-traded funds (ETF) such as the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) purchase large amounts of physical gold. They then allow investors to buy into gold without purchasing mining stocks. These purchases are not physical gold however and they are traded on the exchange like other stock options. However, these ETFs are intended to mirror the cost of gold, not move it, and carry very similar risks to other typical stocks and bonds, making them not as ideal for diversifying as physical gold.

Portfolio Considerations

The question to investors, is what is their reason for purchasing gold? Gold is an excellent way to diversify one’s portfolio. What is most important is that investors go into their purchase understanding the limitations of what gold can do.

It is important to recognize that the wisdom managing a standard investment portfolio would equally be valid with gold, which includes avoiding concentration risk. It is never recommended to have a single majority invested in any one asset as it, of course, defeats the benefit of diversifying in the first place.

Holding Value

No matter what you think of gold, the value it retains cannot be argued against. Many scholars have looked at the similarity between Roman soldiers and our own modern warfighters. Over 2000 years have passed, but according to Erb and Harvey the overall worth has remained relatively stable. Roman troopers were paid 2.31 ounces of gold every year, while centurions got 38.58 ounces.²

Looking at a price of $1,600 per ounce, a Roman fighter was paid $3,704 every year compared to the $17,611 an army private makes. This means that a modern private was paid around 11 ounces of gold annually. The overall rate of return (ROR) would be 0.08% over roughly 2,000 years.²

A centurion, who would equate to a modern day army captain, made $61,730 annually. A captain makes approximately $44,543, or 27.84 ounces at the $1,600 price per ounce, or 37.11 ounces at $1,200. This equals a ROR of 0.02% every year is basically zero.²

In the opinion of Erb and Harvey gold has remained very steady in its purchasing power and the current value of it generally does not equate to its current price.³

The Bottom Line

When considering the purchase of gold, the best thing to do is look at the economic conditions for the biggest economic power players. As the economies in these countries worsen, gold will likely increase in value. This makes gold an excellent choice for diversification, especially since it is not tied to any other factors as a commodity.



Gold Alliance uses primary sources to support our findings. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. National Bureau of Economic Research. “The Golden Dilemma,” Page 3, 33, 34. Accessed March 25, 2020.
  2. National Bureau of Economic Research. “The Golden Dilemma,” Page 16 – 17. Accessed March 25, 2020.
  3. National Bureau of Economic Research. “The Golden Dilemma,” Page 2. Accessed March 25, 2020.

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